Icahn Lassoes Lexar Media Deal

The financier reportedly wants a better merger partner, but does one exist?
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Carl Icahn apparently thinks

Lexar Media

(LEXR)

can do better than

Micron

(MU) - Get Report

.

According to a recent news report, the activist shareholder has begun a campaign to scuttle the

$688 million acquisition announced last week, in the belief that other companies will be willing to pay more for Lexar.

A coalition of Icahn-controlled hedge funds, which reportedly own more than 50% of Lexar shares, are in talks with Lexar's management about the deal and are considering launching a public battle to trigger a bidding war, according to a story in the

New York Post

.

The shareholders are contending that Lexar's management didn't fully consider competing offers with other companies, and hastily inked the deal with Micron according to sources involved in the breakup effort, the

Post

reported.

A spokesperson for Lexar said she could not comment on any rumors regarding the acquisition and said that full details of the acquisition talks leading up to the Micron deal will be disclosed in a

Securities and Exchange Commission

filing expected later this week. Icahn Associates did not return calls.

Micron announced that it was acquiring Lexar on March 8 in a stock deal valuing Lexar shares at $8.43 a share. Since the announcement, Lexar shares have surpassed that level, trading at $8.78 in recent Wednesday trading.

Lexar sells retail products that use NAND flash chips, such as the cards used for storing pictures on digital cameras. Without its own chip manufacturing resources however, Lexar has had trouble competing with rival

SanDisk

(SNDK)

, which sells flash cards via retail and makes its own chips through a joint venture with

Toshiba

.

But Icahn, who recently abandoned a bid to take control of the

Time Warner

(TWX)

board, might be equally challenged in his quest to find a new suitor for Lexar.

American Technology Research analyst Satya Chillara says it is unlikely that a new suitor will emerge. According to Chillara, Lexar shopped itself around for at least a year before inking the deal with Micron.

"These guys have been losing money like hell. Who would want to jump into the fire?" asked Chillara, whose firm does not have any banking relationships with Lexar.

On Tuesday, Lexar reported it lost $23.8 million in its fiscal fourth quarter. The company lost $36.2 million for all of 2005, and $75.5 million the year before that.

The top three NAND flash manufacturers --

Samsung

, Toshiba and

Hynix

-- wouldn't see a great benefit from acquiring Lexar since their profit margins as chipmakers are much higher than the margins associated with retail flash cards, says Chillara.

However, Needham & Co. analyst Pierre Maccagno says there are cost benefits that come with being a vertically integrated company. He points to some of the smaller flash chip manufacturers like

STMicroelectronics

(STM) - Get Report

and

Infineon Technologies

(IFX)

as candidates that could benefit from Lexar's brand name and retail flash card business.

"It's a good model," says Maccagno. "Look at SanDisk."

Few people expect SanDisk to make a move for Lexar. According to American Technology Research's Chillara, SanDisk has accounts with just about all the same retail outlets that Lexar does. And SanDisk already has its own intellectual property relating to flash memory controllers, something which is considered one of Lexar's prime assets.

The only potential reason for SanDisk to step in, says Chillara, would be to prevent Micron from getting ahold of Lexar's intellectual property.

And that scenario would be a long shot, says Chillara.